Not just a one trick pony
Back in the days, (I am not sure how ‘good’ they were, really), most people knew they would have a ‘pension’ to retire from, usually determined by the number of years they worked at an organisation. Those ‘defined benefit’ pensions are almost all extinct – along with lifetime jobs. Employees now change jobs as quickly as every 3 years (research has shown that 4 years is optimal unless you’re being promoted). Sometimes the companies have retirement savings (pension or provident funds) sometimes not. On resigning from a company 95% of those employees are cashing in their retirement funds, and 5 years down the line rarely have anything to show from it. Entrepreneurs that start their own company rarely have retirement savings – they hope to work forever or find a buyer for the company. That isn’t a retirement plan it’s a vague hope. Moving in with the kids isn’t a retirement plan.
There is a massive retirement funding gap looming. As a proportion of the total working population, relatively few have active retirement annuities (RAs). Why? If you took out a retirement annuity on an insurance platform, because you were being sensible and in a job that didn’t have a retirement fund, only to change jobs and have a compulsory fund – you were stuck with your head between a rock and a hard place. Either continue to pay the premiums, even if necessities had to suffer, or take a 30% (or 15% post 2007) penalty snot-klap. That only has to happen once for someone to lose all faith in the system. In other words there is zero flexibility! It is a product designed for the 1950’s when you were in a lifetime job. Quite frankly insurance company RAs should come with a surgeon general’s warning in 50 font on the cover. “Warning. This product can cause an allergic reaction to insurance companies.”
RAs, structured properly and on a flexible platform with no penalties, are a first rate investment. I am not going to go into that here, if you want to read more about them you can do so HERE. Modern retirement funding shouldn’t start and stop with traditional savings ( RAs, pension and provident funds and preservers). We are living in an ever changing environment and our funds need to be more flexible.
Because we are living longer than when RAs were first conceived, we are not going to just need a ‘fixed income’ but lump sums as well. In the past people were expected to live 10-15 years post retirement. Max. Today living 25-30 more years is expected to be commonplace. Not only are we living longer, but we are fully functional, active and independent longer – driving cars, going on holiday, working longer etc. A car could be expected to last say 10 years post retirement – but what happens after that? A retiree is not going to get finance, they have to have the lumpsum. Similarly when downsizing a house. The duties, fees and commission in moving a house can run into hundreds of thousands. Gaps in medical aid widen every year, and the 4 digit above inflation increases can devastate a fixed income. Have a look below:
So what are some other alternatives?
- TFA/TESA Tax free Savings accounts. These are long term investments and the fund can be withdrawn as a lumpsum or monthly (platform dependant). This is a good place to put an investment for a car or other capital payment in the future. Read HERE for more on TFA/TESA. Before jumping in make sure you have a good fund choice, low fees and zero penalties. Some insurers are still trying to gouge out penalties for ‘early surrender’.
- Flexible investments: These don’t come with tax breaks, but you have annual allowances for interest and CGT that you probably aren’t maxing out annually. These can be on LISP platforms, but ETFs and a mixture of the two should be considered.
- Savings accounts: These are the traditional money market, call and savings accounts. Even in retirement you need to keep the emergency account going (3 months expenses). This should be able to be liquidated in 5 days or less – not a 90 day call account! Cash/Bonds barely keep up with inflation so be aware of putting too much in those two asset classes. Your advisor will be able to help you determine the optimum amount to keep in ‘cash’. If you want to read more on structuring retirement savings go HERE.
Action: By the time you hit 40 you need a professional retirement plan – don’t be content with a automated report (Garbage in, garbage out). It must be easy to understand, reviewed annually and recommend more than an RA – and even then be very careful if it isn’t on a LISP. You will never get the time back. Always get professional advice on your retirement fund when leaving a company.
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Author Dawn Ridler